relevance and renewal - mec · mec 2012 annual report 5 5 chair message 7 ceo message 8 about mec...

MEC 2012 ANNUAL REPORT

RELEVANCE AND RENEWAL


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Welcome to MEC’s 2012 Annual Report. It’s been an exciting year on several fronts – product, activity, digital, and web – and we’re pleased about our progress in 2012. We have prepared this report to relay the successes and challenges MEC faced over the last year. We continue to focus on staying relevant to our members, while renewing our organization to respond to members’ changing needs. All the while, we remain true to our roots – inspiring and enabling everyone to lead active outdoor lifestyles.

WELCOME

Jake Stangel


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5 Chair Message 7 CEO Message 8 About MEC 10 Governing MEC 11 Financial Overview 12 Our Products 15 Activity 16 Our Staff 16 MEC Stores 18 Digital and Web 19 Looking Ahead 22 Audited Financial Statements

CONTENTS MEC is a purpose-driven organization, and our purpose is to enable and inspire people (both members and non-members) to lead healthy and active outdoor lifestyles.

Over the last few years we have introduced many new products to support the outdoor lifestyles people lead today in the backcountry, with an increased emphasis on activities such as running and cycling. Your Board has been completely supportive of these changes.

I’m pleased to report that in 2012 we saw a strong increase in sales. Seventy percent of the increase came from products introduced in the last three years, which attests to our members’ acceptance of the changes we’ve made.

Over the last two years your Board has also initiated a number of steps to strengthen our ability to provide the kind of leadership MEC will need as we face the changing Canadian market.

We’re confident that your Board and Management, working closely and collaboratively, can and will keep MEC on track to ensure our continuing ability to serve our members successfully for many years into the future.

Sincerely,

Bill Gibson Board Chair

ChAiR MESSAgE


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Over the past year, product and retail options for Canadian consumers have expanded rapidly due to the arrival of more US retail in Canada and the increasing adoption of e-commerce. We have seen US-based online competitors establish distribution centres in Canada, and we have also seen more competition from eastern-based retail pushing westward. The rapid and ubiquitous adoption of new technologies—smartphones, tablets, mobile applications, and social media—has been central to giving consumers greater choice and control over their global shopping experience.

In addition, the demographics in the Canadian market continue to change: more than 80% of Canadians now live in urban environments, activity preferences are shifting, and the cultural landscape is expanding.

I believe we are at the threshold of a sea change in retail in Canada, and only those organizations that are efficient, nimble, and responsive will survive. This means that MEC cannot stand still. If we are to con-tinue to succeed, MEC must remain relevant to members, renewing the organization from within. We need to refresh our product and service offering, while retaining the qualities that make us unique. In this way, we will meet the changes in our consumers of today and tomorrow.

The great news is that MEC has been responding to the challenges ahead of us and we have seen strong results. With relevance and renewal as our key areas of focus, we have worked to adopt new technologies and respond to changing demographics, while staying relevant to members. Our strategies – notably, in product, activity, digital marketing, and member engagement – are starting to take hold and produce positive results. 2012 was a successful year and our management team is committed to meeting challenges head on. I’m confident our people are up to the task.

Sincerely,

David Labistour CEO

CEO MESSAgE

Jake Stangel


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STRENGTHENED nominations process

EXPANDED product offerings

RECORD YEAR of climbing, backcountry skiing, and whitewater paddling sales

Stores as ACTIVITY HUBS

LAUNCHED iPhone ® app

IMPROVED web assortment and merchandising

MEMBER of 1% For The Planet

AbOUT MECMEC (Mountain Equipment Co-op) is Canada’s leading retailer of clothing, gear, and services for active lifestyles, including hiking, cycling, running, camping, fitness, snowsports, and watersports. First established in 1971, we now have more than 3.5 million members throughout Canada, and serve them at 16 stores in six provinces, and through our website, mec.ca. As a co-op, MEC is owned by its members, who join by purchasing a $5 lifetime individual membership.

MEC’S ViSiON ANd VALUESWe inspire and enable everyone to lead active outdoor lifestyles. We do that by selling outdoor gear, clothing, and services. We match our mem-bers with gear that suits their needs. But we offer more than products. We offer passion. We love to share our expertise, experience, and enthusiasm. We’re guided by our values: adventure, creativity, quality, integrity, leadership, co-operation, human-ity, stewardship, and sustainability.

2012 AT A gLANCE

$30212.33.81622

1,728

million in sales

million products sold

million members; 3.5 million in Canada

stores across Canada and mec.ca

new stores opened

stores renovated

employees


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gOVERNiNg MECAs a co-op, MEC has a democratically owned business structure. Members pool their resources to obtain access to products and services that support active outdoor lifestyles.

MEC is governed by a nine-member Board of Directors, which members elect. Three directors are elected each year to serve three-year terms. The Board structures its work through various committees: Finance and Audit, Elections and Member Communications, Governance, Human Resources and Compensation, and Sustainability. Major decisions such as capital expenditures (new stores) are made by the Board as a whole. The Board works closely with the CEO and Senior Management Team to provide vision and strategy for MEC.

As MEC’s business continues to evolve, so do its governance requirements. If MEC is to continue to grow and succeed in an increasingly competitive and complex retail environment, the Board must ensure that MEC is serving the membership’s interests and continuing to provide for member input. This requires strong and balanced leader-ship at the board level, particularly regarding fiduciary responsibilities.

Toward that end, the Board took two key initia-tives last year to strengthen its leadership po-tential: providing for a more rigorous nomination process and modernizing MEC’s Rules.

MEC RULESAs MEC evolves, it’s vital that our Rules of Co-operation embody and support changing governance needs. This is why the Board initi-ated the Rule Modernization Project. In 2012, the project laid the groundwork for a resolution proposed at the 2013 election, which aimed to modernize MEC Rules by:

The resolution passed, with 91% of those who voted approving it. The results were presented to members at the 2013 Annual General Meeting.

FiNANCiAL OVERViEWAs a co-operative business, we have a different economic and financial structure than most other businesses. We don’t aim to maximize profit. How-ever, we operate in the same market environment as other businesses and must ensure we have a robust balance sheet and sufficient annual surplus to enable us to invest in the future. In key areas, our performance needs to be the same or better than our competitors. MEC needs to ensure viability at a time of much volatility – with chang-ing markets, varying exchange rates, fluctuating spending patterns, and increased competition.

Our success depends on strong cash flow, effective movement of inventory, ongoing store development and productive use of floor space, investment in product development and manage-ment of costs of goods, investment in appropriate information technology, employment and training of engaged store staff, and integrity and trust with our members and stakeholders. We prioritize our investments and expenses to achieve this.

NOMiNATiONS PROCESSIt’s increasingly imperative for election candidates to possess the desired skills, experience, values, and other attributes that can fill Board gaps and make a positive contribution to the organization.

In the 2012 election, members endorsed a new nominations process, empowering the Board to develop detailed criteria for new directors and provide members with a qualified ballot of candidates for the 2013 election. The result was a roster of 12 candidates who strongly aligned with MEC’s values, and had senior-level experience in retail, supply chain, human resources, and information technology.

Every year, the Board will review its leadership needs and identify experience and skill gaps that it seeks to address through the nomination and election process. Information about board requirements and the nominations process is periodically updated on mec.ca.

• Ensuringtheycomplywithco-op legislation in BC

• BetteraligningthemwithMEC’s governance practices

• Providingforahigherstandardof governance at MEC

2012 PERFORMANCEIn 2012, our gross sales topped $300 million, an 11.8% increase over 2011. We attribute this to same-store sales growth driven by new product and service offerings, as well as above-forecasted sales at our new and renovated stores. We also saw substantial growth in web sales and launched an iPhone shopping app.

At the end of 2012, we owned $222.4 million of assets (cash, inventory, property, accounts receivable, and equipment). We owed $53.9 million (payables, gift cards, operating loan balance, and long-term debt). Our members had invested $168.5 million in shares (equity).

In 2012, we achieved an inventory turn rate of 2.12, below our target of 2.3. Unfortunately, this means we overstocked on some products and had to put inventory on clearance to make room for new products. This affected our margins, and ultimately the amount of money we were able to give back to members in the form of a patronage return.

See 2012 audited financial statements.

Sterling Lorence 13


MEMbERShiP ANd PATRONAgE RETURN Because MEC is a member-owned organization, our earnings at the end of the year (surplus) are returned to members through the declaration of a patronage return. Our surplus is the balance left over after paying suppliers, employees, and other operating costs.

At the end of the financial year the Board declares the amount of the patronage return, to be given to the membership. The total is divided between individual members based on how much money each member spent at the Co-op over that year. While we return our surplus to our members, they direct us to retain cash generated from our operations to finance the strategic growth and investments that best serves them in the long term. Each member’s portion of the patronage return is allocated to the member as a quantity of shares (each worth $5). Every member has an account that shows the value of patronage shares held in their name. For 2012, the Board declared a patronage return of over $8.1 million.

In the years when the Co-op’s financial affairs are sound and the organization is adequately funded, the Co-op buys back patronage shares from its members’ share accounts. We return the money to members in the form of a share redemption. In 2012, the Board decided to retain patronage shares within the organization in order to finance capital requirements.

Since 1971, MEC has completed 12 share redemp-tions totalling more than $18 million.

ECONOMiC iMPACTSMEC’s operations in Canada make a significant contribution to the Canadian economy. In 2012, we estimate that we created approximately $918 million in direct spin-off economic activity through our payroll, member spending on outdoor recre-ation, and community contributions.

iNVESTiNg iN ThE FUTUREIn 2013, we will begin investing in more efficient supply chain processes and systems to ensure the integration of all our channels – online, digital,

and stores. Developing supply chain efficiency is critical to competing in today’s global retail climate.

OUR PROdUCTSMEC sells outdoor products and gear. Almost half of what we sell is MEC-brand product, but we also have strong relationships with some of the world’s leading outdoor brands. In addition to a comprehensive range of gear and clothing for our “core” or foundational activities – climb-ing, paddling, snowsports, and hiking – we’ve introduced other gear and services to encourage members to stay active, and to reflect the range of activities they pursue. As a result, we’ve restructured product categories into three focused units – Backcountry, Active Lifestyle, and Lifestyle – to serve our three predominant groups of outdoor enthusiasts, and to provide authenticity, efficiency, and greater coherence to assortments.

Backcountry What members need for hard-core backcountry performance, from climbing to paddling. (These are MEC’s roots, and core to our existence.)

ActiveLifestyleWhat members need for urban outdoor activity and training for backcountry, including cycling, running, and yoga.

LifestyleWhat members need for après play, travel, and kids, from post-climbing wear to bike commuting.

iN 2012, OUR ACTiVE LiFESTyLE PROdUCTS SAW ThE biggEST gAiNS, PARTiCULARLy iN ThE FOLLOWiNg AREAS: Road RunningIn the last two years, participation in running has doubled in some cities. We’re now supporting members through a full assortment of running products (i.e., apparel, footwear, accessories) from leading brands (e.g., Nike, New Balance) as well as the MEC brand.

CyclingOver the last few years, we’ve expanded even further into cycling by selling MEC bikes and

opening bike service shops in most of our stores. MEC bikes continued to enjoy strong demand from members, with the urban-oriented Hold Steady being the single biggest seller. We also became the exclusive Canadian supplier of German-designed Ghost Bikes, known for excellent performance, beautiful designs, and superb engineering.

Training and YogaMembers are increasingly training and/or doing yoga as part of a host of activities. In 2012, we began carrying complete training/yoga assort-ments from leading brands, such as Nike and Prana, offering both good value and fashionable styling.

Looking ForwardIn our lifestyle category, we have been focusing on fashion, fit, and colour, which are becoming increasingly important, especially among female members. This enhanced line will be introduced in 2013.

In all of these changes, we are gratified to see that we also had our best year on record in three of our core traditional backcountry categories:

We understand that backcountry is our heritage and remains essential to our support to members, and to our success. Our success in 2012 rein-forces our belief that we don’t have to sacrifice technical areas for the sake of new product. In fact, the new products are exposing Canadians to the backcountry categories and encouraging them to try something new. This is a great align-ment with our purpose.

• Climbing

• Backcountryskiing

•Whitewaterpaddling


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PROdUCT iNTEgRiTyProduct assortment isn’t enough. Our Product Design Charter highlights our principles of design and product integrity at MEC: it’s the foundation for building innovative, functional, and durable MEC-brand products. Our product integrity criteria include:

While products need to be high quality, perform well, look good, and be a good value, they also need to be as sustainable as possible. In that light, we know that MEC-brand products represent the single largest part of our overall ecological

footprint. As an organization with a strong sus-tainability commitment, we recognize that while we can never entirely eliminate our impacts, we can work to reduce them as much as possible.

MEC is a founding member of the Sustainable Apparel Coalition (SAC), a coalition that has now grown to over 75 leading global apparel and foot-wear organizations. In 2012, MEC worked with the SAC to pilot the Higg Index, a tool to measure the environmental and social performance of apparel and footwear products. The Index represents a huge leap for our industry, as it provides a single, universal approach for measuring sustainability in the apparel industry across the entire supply chain.

We can also be proud of the fact that we’ve been heavily involved in the establishment of bluesign ®, an organization that has established standards for environmentally preferred materials. There are

• Quality

• Performance

• Value

• Aesthetics

• SourcingandEnvironmentalFootprint

now 264 Bluesign System Partners, including brands, retailers and suppliers, across 25 countries.

We also continue to work to improve our sourcing practices through factory audits, partnerships with other organizations, our work with the Fair Labor Organization, and participation in the Sustainable Compliance Initiative.

Get more information on our comprehensive environmental and sourcing efforts.

ACTiViTy In 2012, we continued our efforts to inspire and enable more people to lead active outdoor lifestyles. Our stores now function as hubs of their local outdoor scene. To generate activity-related communities in and around our stores, we have implemented initiatives such as running

and training clinics, store meet-ups and events, supported through activity coordinators at each store. This activity initiative is facilitated by a new activity portal on mec.ca; members can post an event or sign up for an MEC-sponsored event or courses/clinics.

In 2012, over 40 road races (running) and 350 events, including classes, meet-ups, and seminars, were held across the country. This provides a strong foundation to pursue our goal of doubling the number of races and events in 2013, and reflects a deeper engagement and support to ensure store communities are active communities.

As part of our commitment to contribute, through member purchases, at least 1% of the previous year’s sales to community causes, we contributed more than $1.1 million to access and activity initiatives to increase existing and new members’ participation in self-propelled outdoor recreation.

http://www.mec.ca/AST/ContentPrimary/Sustainability/AccountabilityReport.jsp

http://www.mec.ca/AST/ContentPrimary/Sustainability/AccountabilityReport.jsp


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OUR STAFF By the end of 2012, we had 1,728 employees, a 12% increase from 2011 (1,544). Fewer than half were full time, similar to past years. Our staff work at Head Office, in our Service Centre and our Distribution Centre, and in 16 stores across Canada.

For us to succeed, we need to focus on staff who enjoy being active and who love serving members. By its nature, retail is service oriented, and we actively seek out people who have a strong service ethic.

In 2012 we were recognized as being one of Canada’s Top 100 Employers, one of BC’s Top Employers, and acknowledged as being one of the Greenest Employers in Canada.

In 2013, we will launch a diversity pilot project in Vancouver and Toronto, with the specific goal of increasing the diversity of MEC employees to better reflect our membership in these cities.

MEC STORESWhile our website is key to web sales and traffic, MEC stores remain primary touch points for members. We are proud of our store network, and in 2012 made significant investments to expand and deepen our reach to members by opening, renovating, and expanding stores:

North VancouverOur new 22,000-square-foot store opened in June and immediately met with a favourable re-sponse from members and the community. Sales increased dramatically, and the store stands as a landmark green development.

EdmontonA complete renovation ensures a broader product assortment and better merchandising, including a bike fit room, a community room for local groups, and an expanded bike shop.

MontrealThis trial of an urban boutique concept on rue Saint-Denis aims to introduce Montrealers to MEC as a contemporary and youthful brand. Through the store, we also introduced a same-day delivery program, where members can have items shipped from our two other Montreal-area stores to Saint-Denis on the same day.

OttawaA significant expansion was completed last fall, increasing the total retail area by 50%, and providing members with an expanded assort-ment, including improved cycling and footwear merchandising, and a full-service bike shop.

We’re pleased to report that all of the stores have exceeded forecast, and members have reacted positively to the new stores and expansions.

In 2013, we will continue to open select stores to serve members. Our Langley, BC, store is slated to open in June 2013, with alargeassortmentforourFraserValleymembers.Wearealsolookingtostart construction on a store in North York, a second A-sized store in the Greater TorontoArea.Finally,we’veoutgrown our office in Vancouver.

We are having a new purpose-built facility developed that will be our home for many years to come through a long-term lease. Both the office and North York store are expected to be completed in 2014.

MEC OttawaMEC North Vancouver; inset: MEC Saint-Denis


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digiTAL ANd WEb Online retail skyrocketed in 2012: with the popularity of tablets, cell phones and digital applications, consumers have more options about where they shop, and retailers face greater competition. So how do retailers and brands ensure their relevance in the market?

At MEC, we made great strides in 2012 to meet these changing technological needs. We made changes to our website to improve our merchan-dising through enhanced product comparison functionality, on-model imagery, tablet-friendly content, an improved checkout process, and both product and demonstration videos to provide better information. As a result, our conversion rate was higher than projected (1.17%) as was web satisfaction (83%).

We also created an iPhone app, free for down-load, which enables users to shop for over 7,800

LOOkiNg AhEAdproducts. In addition, the app has French and English support, product reviews, barcode scanning, a store locator, a gift card option, and wish lists.

So far the results have been extremely positive. Our Shop MEC iPhone app shot to the number one spot in the Canadian App Store under the Lifestyles category on its first day. The app is already generating more sales than our smallest store and it’s chasing our next smallest store.

Digital and mobile technology is a very important part of the future of the organization, and in 2013, we plan to further improve our web experience by implementing search and product guided navigation, abandoned cart reactivation, and web personalization. We will also improve the features of our iPhone app, and work on a mobile/tablet-optimized website for non-Apple mobile devices.

As noted, the retail competitive environment continues to accelerate, and the onus on MEC to respond is greater than ever. We need the organization to be agile and responsive to change, and welcome the opportunity of continuing to be responsive to members’ needs and wants. We welcome feedback. Please contact us at [email protected].

mailto:info%40mec.ca?subject=

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British Columbia850,336 members21.9%

Alberta589,297 members15.2%

Saskatchewan48,179 members1.2%

Yukon8,345 members0.2% Northwest

Territories8,159 members0.2%

Nunavut5,515 members0.1%

Manitoba115,253 members3%

Ontario1,170,102 members30.2%

Quebec582,688 members15%

Prince Edward Island6,025 members0.2%

New Brunswick30,790 members0.8%

Nova Scotia96,546 members2.5%

Newfoundland and Labrador22,763 members0.6%

<1% Members

10–20% Members

1–10% Members

20–35% Members

91.2%

5.3%

3.5%

100%

3,533,998

205,338

137,563

3,876,899

Canadian Members

US Members

International Members

Total Global

MEMbER dEMOgRAPhiCS

AUdiTEd FiNANCiAL STATEMENTS


Financial Statements of

MOUNTAIN EQUIPMENT CO-OPERATIVE

Year ended December 30, 2012

KPMG LLP Chartered Accountants PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada

Telephone (604) 691-3000 Fax (604) 691-3031 Internet www.kpmg.ca

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.

INDEPENDENT AUDITORS' REPORT

To the Members of Mountain Equipment Co-operative

We have audited the accompanying consolidated financial statements of Mountain Equipment Co-

operative, which comprise the consolidated balance sheet as at December 30, 2012, the consolidated

statements of earnings and surplus and cash flows for the year then ended, and notes, comprising a

summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial

statements in accordance with Canadian accounting standards for private enterprises, and for such

internal control as management determines is necessary to enable the preparation of consolidated

financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our

audit. We conducted our audit in accordance with Canadian generally accepted auditing standards.

Those standards require that we comply with ethical requirements and plan and perform the audit to

obtain reasonable assurance about whether the consolidated financial statements are free from

material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures

in the consolidated financial statements. The procedures selected depend on our judgment, including

the assessment of the risks of material misstatement of the consolidated financial statements,

whether due to fraud or error. In making those risk assessments, we consider internal control

relevant to the entity’s preparation and fair presentation of the consolidated financial statements in

order to design audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the entity's internal control. An audit also includes

evaluating the appropriateness of accounting policies used and the reasonableness of accounting

estimates made by management, as well as evaluating the overall presentation of the consolidated

financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis

for our audit opinion.

Mountain Equipment Co-operative Page 2

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the

consolidated financial position of Mountain Equipment Co-operative as at December 30, 2012, and its

consolidated results of operations and its consolidated cash flows for the year then ended in

accordance with Canadian accounting standards for private enterprises.

Comparative information

The consolidated financial statements of Mountain Equipment Co-operative as at and for the year

ended December 25, 2011, were audited by another auditor who expressed an unmodified opinion on

those financial statements on April 11, 2012.

Chartered Accountants

April 10, 2013 Vancouver, Canada

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MOUNTAIN EQUIPMENT CO-OPERATIVE Consolidated Balance Sheet (Expressed in thousands of dollars) December 30, 2012, with comparative information for 2011

December 30, December 25, 2012 2011

Assets Current assets:

Cash and cash equivalents (note 3) $ 5,495 $ 8,905 Accounts receivable 789 1,038 Inventory (note 4) 69,343 62,470 Prepaids and deposits 2,760 2,830

78,387 75,243

Property and equipment (note 6) 144,036 118,237

$ 222,423 $ 193,480

Liabilities and Members' Equity Current liabilities:

Operating loan (note 8(a)) $ 3,000 $ - Amounts owing to suppliers, governments and

employees (note 7) 26,085 23,699 Gift cards and provision for sales returns 8,570 8,402 Current portion of long-term debt (note 8(b)) 985 - Current portion of deferred lease inducements 132 126

38,772 32,227

Long-term debt (note 8(b)) 13,990 -

Deferred lease inducements 328 383

Future income taxes (note 9) 828 916

53,918 33,526 Members’ shares (note 10) 166,879 157,541 Contributed surplus (note 11) 653 673 Surplus 973 1,740

168,505 159,954 Commitments and contingencies (note 12) Subsequent events (note 14)

$ 222,423 $ 193,480

See accompanying notes to consolidated financial statements. Approved on behalf of the Board: (signed) Bill Gibson Director (signed) Jonathan Gallo Director

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MOUNTAIN EQUIPMENT CO-OPERATIVE Consolidated Statement of Earnings and Surplus (Expressed in thousands of dollars) Year ended December 30, 2012, with comparative information for 2011

Year ended Year ended December 30, December 25, 2012 2011

Sales $ 302,040 $ 270,157 Cost of sales 205,368 178,130

Gross margin 96,672 92,027 Selling and administration expenses (schedule) 91,898 85,364

4,774 6,663 Other income (schedule) 2,583 2,510

Earnings before patronage return and income taxes 7,357 9,173 Patronage return 8,116 9,000

Earnings (loss) before income taxes (759) 173 Provision for (recovery of) income taxes (note 9):

Current 96 133 Future (88) (63)

8 70

Net earnings (loss) (767) 103 Surplus, beginning of year 1,740 1,637

Surplus, end of year $ 973 $ 1,740

See accompanying notes to consolidated financial statements.

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MOUNTAIN EQUIPMENT CO-OPERATIVE Consolidated Statement of Cash Flows (Expressed in thousands of dollars) Year ended December 30, 2012, with comparative information for 2011


Cash provided by (used in): Operations:

Net earnings (loss) $ (767) $ 103 Items not involving cash:

Amortization 8,435 8,346 Loss on disposal of property and equipment 23 - Amortization of deferred lease inducements (127) (101) Future income taxes (88) (63) Shares issued by application of patronage return 8,116 9,000

15,592 17,285 Change in non-cash operating working capital items

related to operations (3,700) (5,208)

11,892 12,077 Financing:

Proceeds from operating loan 3,000 - Proceeds from long-term debt 14,975 - Shares issued to new members 1,229 1,128 Shares redeemed (6) (2,492) Shares withdrawn (1) (1) Contributed surplus from unclaimed share redemptions, net (20) (39)

19,177 (1,404) Investments:

Purchase of property and equipment (34,479) (7,913)

Increase (decrease) in cash and cash equivalents (3,410) 2,760 Cash and cash equivalents, beginning of year 8,905 6,145

Cash and cash equivalents, end of year $ 5,495 $ 8,905

The following non-cash transactions occurred in the year:

Property and equipment purchased included in amounts owing to suppliers $ 717 $ 939

See accompanying notes to consolidated financial statements.

MOUNTAIN EQUIPMENT CO-OPERATIVE Notes to Consolidated Financial Statements (Expressed in thousands of dollars) Year ended December 30, 2012

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1. Operations:

Mountain Equipment Co-operative (the “Co-operative”) is a member owned and directed retail

consumer co-operative. It is incorporated under the Co-operative Association Act of British

Columbia and serves its members through stores across Canada as well as through a call centre

and website.

The current fiscal year consists of 371 days (December 26, 2011 to December 30, 2012) and the

comparative fiscal year consists of 364 days (December 27, 2010 to December 25, 2011).

2. Significant accounting policies:

(a) Consolidation and preparation of financial statements:

These consolidated financial statements have been prepared in accordance with accounting

standards for private enterprises (“ASPE”) and include the accounts of the Co-operative’s

wholly owned subsidiary, 1314625 Ontario Limited, a substantially inactive company.

(b) Revenue recognition:

The Co-operative recognizes revenue when the title of goods passes to the member.

Revenue from store sales is recognized at the point of sale and revenue from online and call

centre sales is recognized when the product is shipped. Revenue from gift certificates is

recognized as certificates are redeemed. The Co-operative reports its revenue net of sales

discounts and returns.

(c) Cash and cash equivalents:

Cash and cash equivalents consist of cash on hand, balances with banks, and short-term

investments with maturities of less than 30 days.

(d) Inventory:

Inventory is valued at the lower of weighted average cost and net realizable value. The cost

of inventory includes all costs of purchase net of vendor allowances, costs of conversion, and

other costs incurred in bringing the inventories to their present location and condition.

Net realizable value is the estimated selling price in the ordinary course of business less the

estimated necessary costs to make the sale.

(e) Property and equipment:

Property and equipment are recorded at cost less accumulated amortization. Amortization is

recorded annually using the following rates and methods: Asset Basis Rate Buildings Declining balance 4 - 6% Furniture, fixtures and equipment Declining balance 6 - 55% Computer software Straight line 5 years


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2. Significant accounting policies (continued):

(e) Property and equipment (continued):

Leasehold improvements are amortized on a straight-line basis over the lesser of the

estimated useful life of the asset or the term of the lease plus one renewal period. The

amortization terms range from 2 to 25 years.

(f) Lease inducements:

The Co-operative records rent expense on a straight-line basis over the term of the lease.

Accordingly, reasonably assured rent escalations are amortized over the lease term.

Free rent periods and lease inducements are deferred and amortized over the lease term

plus one renewal period as a reduction of annual rent expense.

(g) Patronage return:

The patronage return is deducted from earnings for the year in which the return is declared

by the Board of Directors and represents a refund of the current year’s sales proceeds to the

members based on their purchases during the year.

(h) Derivative financial instruments and hedge accounting:

The Co-operative uses foreign exchange contracts in its hedging strategy to manage its

exposure to currency risks on highly probable United States (“US”) dollar inventory

purchases.

Where the requirements for hedge accounting are met, the Co-operative designates and

documents the foreign exchange contracts as hedges of anticipated US dollar inventory

purchases. The documentation identifies the anticipated transaction being hedged, the risk

that is being hedged, the type of hedging instrument used and how effectiveness will be

assessed. The hedging instrument must be highly effective in offsetting changes in the

anticipated cash flows both at inception and throughout the life of the instrument. Hedge

accounting is discontinued prospectively if it is determined that the hedging instrument is no

longer effective as a hedge, the hedging instrument is terminated, or upon the sale or early

termination of the hedge.

The foreign exchange contracts held by the Co-operative at year-end that qualify for hedge

accounting are not presented on the year-end balance sheet at their fair value. The gains

and losses relating to these contracts are recognized as an adjustment to any gain or loss

arising on the settlement of the hedged inventory purchases.

(i) Foreign currency translation:

The Co-operative translates assets and liabilities denominated in foreign currencies at

exchange rates in effect at the end of the year. Exchange gains and losses from unhedged

transactions denominated in foreign currencies relating to inventory purchases are included

in cost of sales. Included in the 2012 cost of sales was a foreign exchange gain of $805

(2011 - gain of $1,457).


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(j) Employee benefits:

The Co-operative contributes on a defined contribution basis to assist employees with

retirement savings. The cost is included in salaries, wages and employee benefits expense.

Contributions of $1,237 (2011 - $1,185) were made during the fiscal year ended

December 30, 2012.

(k) Income taxes:

The Co-operative follows the liability method of accounting for income taxes. Under this

method, income tax liabilities and assets are recognized for the estimated tax consequences

attributable to differences between the financial statement carrying amount of existing assets

and liabilities.

Future tax assets and liabilities are measured using enacted or substantively enacted tax

rates expected to apply to taxable income in the years in which those temporary differences

are expected to be recovered or settled. The effect on future tax assets and liabilities of a

change in tax rates is recognized in income in the year that includes the date of enactment or

substantive enactment. A valuation allowance is recorded against any future income tax

asset if it is more likely than not that the asset will not be realized. Income tax expense or

benefit is the sum of the Co-operative’s provision for the current income taxes and the

difference between the opening and ending balances of the future income tax assets and

liabilities.

(l) Use of estimates and measurement uncertainty:

In preparing the Co-operative’s financial statements, management is required to make

estimates and assumptions that affect the reported amounts of assets and liabilities at the

date of the financial statements and reported amounts of revenue and expenses during the

period. Actual results could differ from these estimates. Areas of measurement uncertainty

include inventory valuation, allowance for sales returns, allowance for future warranty

expenses, and the amount of gift certificates likely to be redeemed.

(m) Financial instruments:

Financial instruments are recorded at fair value on initial recognition. Freestanding derivative

instruments that are not in a qualifying hedging relationship and equity instruments that are

quoted in an active market are subsequently measured at fair value. All other financial

instruments are subsequently measured at cost or amortized cost, unless management has

elected to carry the instruments at fair value. The Co-operative has not elected to carry any

such financial instruments at fair value.

Transaction costs incurred on the acquisition of financial instruments measured subsequently

at fair value are expensed as incurred. All other financial instruments are adjusted by

transaction costs incurred on acquisition and financing costs. These costs are amortized

using the straight-line method.


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(m) Financial instruments (continued):

Financial assets are assessed for impairment on an annual basis at the end of the fiscal year

if there are indicators of impairment. If there is an indicator of impairment, the Co-operative

determines if there is a significant adverse change in the expected amount or timing of future

cash flows from the financial asset. If there is a significant adverse change in the expected

cash flows, the carrying value of the financial asset is reduced to the highest of the present

value of the expected cash flows, the amount that could be realized from selling the financial

asset or the amount the Co-operative expects to realize by exercising its right to any

collateral. If events and circumstances reverse in a future period, an impairment loss will be

reversed to the extent of the improvement, not exceeding the initial impairment charge.

(n) Comparative information:

Certain comparative information has been reclassified to conform with the financial statement

presentation adopted for the current year.

3. Cash and cash equivalents:

Cash and cash equivalents consist of the following:

December 30, December 25, 2012 2011 Cash and cash equivalents less outstanding cheques $ 5,495 $ (2,026) Bankers’ acceptances and term deposits (at 1.00% to 1.01%) - 10,795 Restricted cash - 136

$ 5,495 $ 8,905

Restricted cash relates to amounts held in trust for construction holdbacks.

4. Inventory:

December 30, December 25, 2012 2011

Raw materials $ 925 $ 1,543 Work-in-progress 585 522 Finished goods 69,171 61,861 Inventory provision (1,338) (1,456)

$ 69,343 $ 62,470


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4. Inventory (continued):

The amount of inventories recognized as a component of cost of sales during the year was

$185,408 (2011 - $159,608).

Also included within cost of sales for the year ended December 30, 2012 are charges to inventory

within the normal course of business, made throughout the year, of $3,743 (2011 - $3,061).

These charges include the disposal of obsolete and damaged product, shrinkage, and permanent

markdowns to net realizable values.

5. Foreign exchange contracts:

The Co-operative holds a number of option-dated forward contracts that are intended to settle

future US dollar inventory purchases. At the balance sheet date, the Co-operative had contracts

to purchase US currency outstanding totalling USD$50,000 (2011 - USD$43,700) at an average

rate of CAD$0.99 (2011 - CAD$0.99) that mature at various dates to August 2, 2013 (2011 - to

September 7, 2012). At December 30, 2012, these contracts all qualified for hedge accounting.

6. Property and equipment: December 30, December 25, 2012 2011 Accumulated Net book Net book Cost amortization value value Land $ 51,971 $ - $ 51,971 $ 30,230 Buildings 71,619 17,324 54,295 41,659 Furniture, fixtures

and equipment 41,251 30,045 11,206 11,142 Leasehold improvements 33,258 13,720 19,538 20,095 Computer software 16,518 14,034 2,484 2,598 214,617 75,123 139,494 105,724 Capital projects in progress 4,542 - 4,542 12,513

$ 219,159 $ 75,123 $ 144,036 $ 118,237

Amortization for the year amounted to $8,435 (2011 - $8,346).

7. Amounts owing to suppliers, governments and employees:

Government remittances payable at December 30, 2012 in the amount of $2,129 (2011 - $1,560)

relating to federal and provincial sales taxes, payroll taxes, and workers’ safety insurance are

included in amounts owing to suppliers, governments and employees.


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8. Operating loan and long-term debt:

(a) Operating loan:

The Co-operative has available a revolving demand credit facility of $45,000 that has been

arranged to fund general operations. The facility can be drawn through bankers’

acceptances, Canadian and US dollar operating loans, LIBOR loans and letters of credit

(note 12(b)). The loan is secured by a general security agreement and a first charge on

certain property. As at December 30, 2012, $36,019 (2011 - $25,276) of the facility was

available.

LIBOR based loans accrue interest at Libor plus 1.0% - 1.5%. Operating loans accrue

interest at the bank’s prime rate plus 0% - 0.5%. US operating loans accrue interest at the

US base rate plus 0% - 0.5%. Bankers Acceptances accrue interest at the banker’s

acceptance rate plus 1.0% - 1.5%. The amount of the spread, in excess of the base interest

rate, varies with reference to certain financial ratios of the Co-operative.

The outstanding loan as at December 30, 2012 has been advanced through Bankers’

Acceptances.

(b) Long-term debt:

The Co-operative has a long-term debt facility of $15,000 that has been arranged to fund

capital expenditures. The facility can be drawn through bankers’ acceptances and Canadian

operating loans and is secured by a general security agreement and a first charge on certain

property. Repayment of the long-term debt is in quarterly installments of $250,000, plus

interest, amortized over a 15-year period. The loan matures on September 30, 2014. As at

December 30, 2012, the loan balance is $15,000 (2011 - nil).

Operating loans accrue interest at the bank’s prime rate plus 0% - 0.5%. Bankers

Acceptances accrue interest at the banker’s acceptance rate plus 1.0% - 1.5%. The amount

of the spread, in excess of the base interest rate, varies with reference to certain financial

ratios of the Co-operative.

The outstanding loan as at December 30, 2012 has been drawn through Bankers’

Acceptances.

Under the terms of the above mentioned credit facilities, the Co-operative is required to meet

certain financial covenants. As at December 30, 2012, the Co-operative was in compliance

with the covenants.


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9. Income taxes:

(a) The reconciliation of income tax computed at the statutory tax rates to the income tax

provision is set out below.

The statutory income tax rate applicable to the Co-operative is 25.73% (2011 - 27.29%).

December 30, December 25, 2012 2011 Provision for income taxes based on statutory rates $ (195) $ 47 Adjustment for permanent differences 157 49 Change in future income tax liabilities due to change in

income tax rates 4 12 Other adjustment/recoveries of over accruals 42 (38)

$ 8 $ 70

(b) The tax effect of temporary differences that give rise to significant components of the future

income tax assets and future income tax liabilities is presented below.

December 30, December 25, 2012 2011 Future income tax assets:

Deferred lease inducements $ 119 $ 130 General reserves 659 614 Other assets 118 113 896 857

Future income tax liabilities:

Property and equipment 1,724 1,773

$ 828 $ 916

10. Members’ shares:

The authorized capital of the Co-operative is an unlimited number of shares with a par value of

$5.00 per share. Each member is required to purchase one share for cash. The Co-operative

distinguishes separately the number of outstanding shares issued for cash and the number

issued by application of patronage return.

As set out in the rules of the Co-operative, membership entitles each member to one vote in the

governance of the Co-operative and the right to purchase goods. Also as set out in the rules,

member-initiated withdrawals are limited to 1% of the total share capital, subject to the discretion

of the Board of Directors.


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10. Members’ shares (continued):

The cumulative shares issued by source are as follows: December 30, 2012 December 25, 2011 Number Number of shares Amount of shares Amount (000s) (000s) Membership shares issued 3,879 $ 19,395 3,633 $ 18,165 Shares issued by application

of patronage return 29,497 147,484 27,875 139,376

33,376 $ 166,879 31,508 $ 157,541

A summary of shares issued and redeemed during the year is as follows: December 30, 2012 December 25, 2011 Number Number of shares Amount of shares Amount (000s) (000s) Balance, beginning of year 31,508 $ 157,541 29,981 $ 149,906 Shares issued to new members 246 1,229 225 1,128 Shares issued by application

of patronage return 1,623 8,116 1,800 9,000 Shares redeemed (1) (6) (498) (2,492) Shares withdrawn - (1) - (1)

33,376 $ 166,879 31,508 $ 157,541

11. Contributed surplus:

The changes in contributed surplus are as follows:

December 30, December 25, 2012 2011 Balance, beginning of year $ 673 $ 712 Unclaimed share redemption amounts 22 - Claims of share redemption amounts previously allocated

to contributed surplus (42) (39)

$ 653 $ 673


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12. Commitments and contingencies:

(a) Lease commitments:

The Co-operative has operating lease commitments for premises and certain equipment.

The minimum annual lease payments scheduled for the next five years and thereafter are as

follows: 2013 $ 4,890 2014 4,828 2015 3,684 2016 3,025 2017 2,873 Thereafter 11,217

(b) Letters of credit:

At December 30, 2012, the Co-operative had outstanding letters of credit in various

currencies through its financial institutions to provide guarantees to certain suppliers. The

letters of credit outstanding at December 30, 2012 amounted to CAD$855 and USD$4,541

and Euro $461; 2011 - CAD$526 and USD$4,098. Of this amount, USD$2,228 (2011 -

USD$1,201) has been included in amounts owing to suppliers, governments and employees

in the consolidated balance sheet of the Co-operative.

(c) Capital project commitments:

The Co-operative is committed to future construction costs relating to a store expansion of up

to $262 (2011 - construction of a new store $4,216). At December 30, 2012, the

Co-operative had a standby letter of credit relating to delivery of certain municipal

requirements for the expansion project of $113 (2011 - nil). No accrual has been made for

this standby letter of credit as all required deliverables are expected to be met through the

project.

13. Financial instruments and risk management:

The Co-operative is exposed to the following risks related to its financial assets and liabilities:

(a) Currency risk:

The Co-operative is exposed to currency risk on some of its amounts owing to suppliers and

expected inventory purchases, which are denominated in currencies other than Canadian

dollars. The Co-operative uses foreign exchange forward contracts to manage the majority of

this exposure.


13

13. Financial instruments and risk management (continued):

(a) Currency risk (continued):

The consolidated balance sheet includes US dollar cash and cash equivalents, as well as US

dollar amounts owing to suppliers. The balances in Canadian dollars and in US dollars are

as follows: December 30, 2012 December 25, 2011 CAD USD CAD USD Outstanding cheques in excess of

cash and cash equivalents $ 1,124 $ 1,129 $ 1,003 $ 983 Amounts owing to suppliers 5,410 5,436 2,482 2,431

(b) Interest rate risk:

The Co-operative’s exposure to interest rate risk depends upon the balance of its cash and

cash equivalents, operating loan and long-term debt. The demand-operating loan and long-

term debt are subject to interest rate risk as the required cash flow to service the debt will

fluctuate as a result of changing market interest rates.

(c) Credit risk:

Financial instruments that potentially subject the Co-operative to credit risk consist of cash

and cash equivalents, bankers’ acceptances and term deposits, and accounts receivable.

The Co-operative uses reputable financial institutions for cash, bankers’ acceptances and

term deposits and believes the risk of loss to be remote. The Co-operative has accounts

receivable from corporate members and government agencies, none of which the

Co-operative believes represent a significant credit risk.

(d) Liquidity risk:

Liquidity risk is the risk that the Co-operative will not be able to meet its obligations as they

become due. The Co-operative’s approach to managing liquidity risk is to ensure that it

always has sufficient cash flows and cash on hand and credit facilities to meet its operating

obligations. The magnitude and timing of share redemptions are considered in managing

liquidity risk.


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14. Subsequent events:

(a) Sale agreement - Vancouver property:

Subsequent to year end, the Co-operative entered into an agreement to sell a property

located in Vancouver, British Columbia and entered into a development management

agreement and related leaseback arrangement with the purchaser. The total project cost,

which will be financed by the purchaser, is estimated to be between $51,060 and $54,600

and is expected to complete in 2014. It is anticipated that this sale leaseback transaction will

be recorded as a capital lease on the balance sheet of the Cooperative. The transaction is

not expected to result in any net financial gain or loss.

(b) Sale agreement - Ottawa property:

Subsequent to year end, the Co-operative completed the remaining processes required to

meet the conditions outstanding on a sale agreement of an investment property in Ottawa,

Ontario. This property was incidental to a larger parcel acquired to allow for the expansion of

the Ottawa store. The sale of the property will result in a net gain of $140.

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MOUNTAIN EQUIPMENT CO-OPERATIVE Consolidated Schedules of Selling and Administration Expenses and Other Income (Expressed in thousands of dollars) Year ended December 30, 2012, with comparative information for 2011


Selling and administration expenses:

Salaries, wages and employee benefits $ 54,142 $ 49,671 Supplies and services 16,628 14,451 Rent and occupancy 11,752 11,047 Amortization 8,435 8,346 Catalogue and membership - 1,713 Interest 918 136 Loss on disposal of property and equipment 23 -

$ 91,898 $ 85,364

Other income (expenses):

Rent and parking $ 1,580 $ 1,380 Gear swap and MEC events proceeds 299 193 Gift certificates unlikely to be cashed 760 148 Miscellaneous income (expense) 329 (25) Interest 19 17 GST, HST and QST to be recovered in respect of patronage

dividend, net of costs incurred (404) 797

$ 2,583 $ 2,510

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